A year after foreign investors were clipped by Argentina on its accumulated debt, worries about further defaults have evaporated in the wake of a raw materials export boom and excess financial liquidity tied to China's explosive growth and its spillover effects on the world economy. The new surpluses in the region also underlie what the report describes as the "complacency" of international capital towards the increased mass unrest and "propitious environment for leftwing leaders elected on a platform of increasing social spending." In effect, the process is being viewed as a New Deal in which "governments can meet their pledges to voters without threatening macroeconomic stability."
But the talk about a "new era" emanating from both the left and the right is being accompanied by equally predictable worry that not enough of the surplus is being used to diversify and cushion the economy in anticipation of the next downturn. =========================== Investors deaf to Latin American populists By Richard Lapper Financial Times April 5 2006
Once, the first whiff of political instability in Latin America would have had investors crowding the exits. Now, hungry for returns, they are disregarding the risks posed by a wave of radical populism that is sweeping the region.
After a bumper 18 months in which bond yields have fallen to historic lows, investment banks - including some that quit the region in the wake of Argentina's economic collapse in 2001 - are back with a vengeance. They are competing fiercely for corporate business and are gung-ho about new opportunities, such as the sale of Brazilian or Mexican bonds denominated in historically weak, but now stable or appreciating, local currencies.
The optimism was palpable at this week's meeting of the Inter-American Development Bank in Belo Horizonte, Brazil, where bankers and fund managers were clearly happy to disregard the volatile political mood.
It will be manifest again on Sunday when voters go to the polls in the first round of elections in Peru, where Ollanta Humala, a radical nationalist, is widely tipped to emerge as eventual victor. He has promised an end to "neo-liberal" policies and regularly attacks foreign companies. But the prospect does not greatly trouble fund managers: they see little chance of his defaulting on his country's debt.
Hugo Chávez, Venezuela's radical anti-American leader, may be deploying revenues from the western hemisphere's largest oil reserves in order to sow the seeds of what he calls "21st-century socialism". No matter: the country's oil wealth is seen as buttressing solvency.
For portfolio investors, countries such as Bolivia - where Evo Morales, a radical indigenous leader who won a landslide victory at polls in December, has confirmed plans to nationalise the gas industry - are too small to count. But of late, radicalism has been spreading beyond the Andes. In the last few months Néstor Kirchner, Argentina's radical president, has nationalised a foreign utility, imposed price controls and sacked Roberto Lavagna, his market-friendly finance minister.
Last year his government negotiated a deal to restructure defaulted debt. So draconian were its terms that it seemed guaranteed to exclude the country from fresh borrowing on international capital markets. But nothing, it seems, can dim investors' enthusiasm: less than a year later, many are willing to lend it money at a fraction of the rates they charged a few years ago.
And in Brazil, leftwing president Luiz Inácio Lula da Silva is maintaining his commitment to conservative fiscal and monetary policy - although that is starting looking more threadbare following the resignation last week of the fiscally orthodox Antonio Palocci as finance minister amid the latest of a series of corruption scandals.
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The leftward trend is not universal. Centre-left Chile and centre-right Colombia - where Alvaro Uribe is expected to win a second term as president next month - continue to pursue pragmatic, market-friendly policies and social reform. But the phenomenon of radical leaders promising to solve the region's chronic problems of social exclusion and poverty appears to be spreading. Andrés Manuel López Obrador, the socialist former mayor of Mexico City, is on course to win the Mexican presidency this year and Daniel Ortega, a 1980s bête noire of the US, is well placed in Nicaragua. Ecuador, too, may shift to the populist left in November elections.
Markets expect Mr López Obrador - like Mr Lula da Silva - to pursue careful macroeconomic policies in a country tightly integrated into the North American economy through migration ties and the Nafta trade accord. Ecuador and Nicaragua, meanwhile, are too small to worry investors.
Vitali Meschoulam, a Latin American analyst at HSBC in New York, explains: "Right now nobody cares." He adds: "There is so much money [and] these are issues that affect development prospects in 2007 and 2008."
What explains this apparent complacency? Latin America - perhaps more than any other region in the world - has been a beneficiary of new patterns in the global economy: notably Asia's rapid economic growth and high savings rates that are helping to sustain a consumer spending boom in the US. Asian manufacturers are selling the products they make to US consumers, with demand in part sustained by low interest rates and plentiful credit. Asia's willingness to invest its savings overseas, in US Treasury bonds and other assets, helps explains why liquidity has been so ample.
Latin America profits from this in several ways. First, Asian - and especially Chinese - demand for raw materials means prices of those are high. China's steel industry has been sucking in Brazilian iron ore. The country's spending on power plants and other infrastructure has forced up the prices of copper from Peru and Chile. And Brazilian and Argentine farmers have found a growing market for their beef among the aspirant middle classes of China's burgeoning cities. Chinese farmers are importing South American soya beans to make animal feed.
US growth is helping revive the manufacturing exports of countries such as Mexico and the smaller economies of Central America and the Caribbean. Latin American and Caribbean migrant workers in the US are doing well. Remittances sent back last year rose 17 per cent to $53.6bn (£30.6bn, ?43.6bn), according to a study published by the Inter-American Development Bank. Finally, the combination of a growing global economy and relatively low interest rates is boosting global liquidity and means investors are anxious to secure the returns available from higher-yielding markets.
As a result of all this, Latin America has recorded three successive years of current account surpluses, its best performance for at least half a century. Reserves have been increasing and dollar debt has been repaid.
According to Latin America Consensus Forecasts, Brazil has reduced its long-term external debt from 40 per cent of gross domestic product in 2002 to an expected 13.5 per cent in 2006. Over the same period, Argentina will have brought down its debt from 118 per cent to an expected 42.5 per cent. Chile, Peru, Mexico and Colombia have seen falls that are similarly dramatic.
Rating agencies have been upgrading Latin American creditworthiness. The view is now widespread among bankers that Brazil - on the brink of bankruptcy in 2002 - could be rated as investment-grade within a year or two. That would allow mainstream pension funds to buy its assets and further reduce borrowing costs.
Walter Molano, at BCP Securities, a Connecticut-based brokerage, is particularly bullish. "Unless there is a major change in Asian demand, there is no need to lighten up or put on short positions. We are in a new era for the emerging markets," he told clients last month. "Latin America is on fire. Credit conditions are improving, and we expect a round of upgrades after the presidential elections. This is the reason why capital continues to pour into our asset class."
It all creates a propitious environment for leftwing leaders elected on a platform of increasing social spending. Taxes from exports and savings achieved from lower borrowing costs mean governments can meet their pledges to voters without threatening macroeconomic stability.
Venezuela's Mr Chávez - who has directed $17bn into special social funds during 2005 and 2006 - is a special case since his country is awash with oil. But social spending has been increasing elsewhere, too. Take Brazil, where Mr Lula da Silva has extended a system of monthly welfare handouts to cover about 8.5m people, yet he has still managed to balance the budget. Even Mr Morales in Bolivia, the poorest country in Latin America, is so flush with funds from higher gas and mineral prices and new taxes that he has been able to create 4,500 jobs for teachers and 1,000 for doctors in his first two months in office.
To some, it all adds up to a redefinition of populism - one that couples a strong welfare system with fiscal restraint. Says Mr Meschoulam: "You can have your cake and eat it. You can have social programmes and pay back the debt." He goes on: "Maybe this is a different type of populism to what we have been accustomed to. It is constrained and responsible."
Plenty of evidence exists to suggest, however, that leftwing governments - whether radical populists like Mr Chávez or more moderate reformers like Mr Lula da Silva - are being lulled into a false sense of security about the strength of their economies and are failing to undertake structural reforms needed to boost efficiency in the long term.
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Many in the market believe that the effect of the emergence on to the world economic stage of China and India will provide permanent insulation from a future downturn. Equally, though, it is possible that a strong cyclical upswing may be exaggerating the extent of the secular realignment taking place - as happened with the enthusiasm for internet technology in the late 1990s.
"We just don't know how robust it is," says Mr Meschoulam, who suggests that there are also parallels between the current enthusiasm for emergent Asia and the idea that the triumph of democracy in the Soviet Union and eastern Europe had "ended history". "They may be right but I just haven't seen the evidence," he says.
Javier Santiso, chief development economist at the Organisation for Economic Co-operation and Development in Paris, says Asian demand for commodities offers Latin America a "historic opportunity" but that most of the region is "simply surfing the wave". And he has an ominous warning: "Sooner or later the wave will stop."